Issue of the week: The housing market’s continued woes

So much for the hoped-for revival of the housing market, said Ben Steverman in BusinessWeek. Last week’s news that U.S. housing starts fell 12.8 percent, to a record-low annual rate of 458,000 units, threw cold water on any prospect of an impending housing revival. And if that report wasn’t depressing enough, along came the latest S&P/Case-Shiller housing price index, which showed that prices in the first quarter of 2009 fell a record 19.1 percent from 2008’s first quarter. Price drops were registered in all 20 cities covered by the survey, with Phoenix, Las Vegas, and San Francisco showing the biggest declines. There is a sliver of a silver lining, though. “One of the housing market’s main problems is a glut of supply—too many homes for sale.” When fewer new homes come to market, supply and demand will begin to balance out.

But that will still leave the market far short of a full recovery, said Mark Gongloff in The Wall Street Journal. A real comeback for housing won’t get under way until prices turn upward again, and that day seems “far away.” That’s because there are enough unsold homes to supply the market for almost 10 months at its current pace of activity. There’s also “a massive shadow inventory of bank- and investor-owned homes.” Add all those dwellings to the mix, and the inventory jumps to a 12-month supply. That suggests that prices must fall further than the 27 percent they’ve tumbled since the market’s peak, in mid-2006. And “as long as prices are falling, banks will take more losses, consumers will feel cautious, and the economic recovery will be tenuous.”

The unsold inventory could disappear faster than many experts expect, said Shawn Tully in Fortune. “The market is working with ruthless efficiency to shrink the oversupply,” as people gobble up bargains, especially in markets that have been racked by foreclosures. What’s more, young Americans continue to join the labor market, and immigrants continue to come here in search of economic opportunity. Those people have to live somewhere, and the demand should whittle away at the existing inventory until the market reaches equilibrium late this year or early in 2010.

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The daring souls who do buy now will find some screaming bargains, said Amy Hoak in Marketwatch.com. But they should know in advance that “there are some negatives to acquiring distressed properties.” Financing is the biggest headache. Most foreclosure purchases are either all cash or financed with a loan from the Federal Housing Administration. And FHA policies generally prohibit loans against properties that are considered uninhabitable. Few banks will lend “if the roof is old and in desperate need of repair, or if plumbing fixtures have been stripped from the property.” Still, some buyers are willing to take a shot at getting the sort of bargain that one lucky purchaser recently found in Minneapolis, paying $42,000 for a house that had previously sold for $165,000. The foreclosure wave isn’t bad news for everyone.